Friday, January 6, 2012

Reputation matters: spillover effects in the enforcement of US SPS measures

This paper uses a novel dataset on United States food import refusals to show that reputation is an important factor in the enforcement of sanitary and phytosanitary measures. The strongest reputation effect comes from a country's own history of compliance in relation to a particular product. The odds of at least one import refusal in the current year increase by more than 300 percent if there was a refusal in the preceding year, after controlling for other factors. However, the data are also suggestive of the existence of two sets of spillovers. First, import refusals are less likely if there is an established history of compliance in relation to other goods in the same sector. Second, an established history of compliance in relation to the same product by neighboring countries also helps reduce the number of import refusals. These findings have important policy implications for exporters of agricultural products, especially in middle-income countries. In particular, they highlight the importance of a comprehensive approach to upgrading standards systems, focusing on sectors rather than individual products, as well as the possible benefits that can come from regional cooperation in building sanitary and phytosanitary compliance capacity.

Non-tariff measures have become progressively more important trade policy instruments as applied tariff rates have fallen across the world in recent years. From a development perspective, technical regulations and product standards are a particularly important type of non-tariff measure because they highlight the fact that the favorable market access accorded under duty and quota-free preferential schemes remains conditional on compliance with regulations in areas such as consumer safety. Previous research shows that product standards and technical regulations in the large, developed markets can have two contradictory sets of effects for developing country exporters. On the one hand, the costs of compliance—retooling, product re-design, testing, and certification—can be substantial enough to keep many small and medium enterprises out of international markets, thereby affecting the pattern of international specialization (e.g., Essaji, 2008). But at the same time, foreign standards can also provide the impetus for firms and sectors to upgrade production technologies and realize beneficial productivity gains (e.g., Maertens and Swinnen, 2009). The question of which types of standards tend to promote which set of effects is clearly of vital policy importance to developing country exporters. The issue of how best to direct technical assistance resources so as to support the upgrading of standards systems and development of compliance mechanisms in developing countries is also an important part of broader Aid for Trade discussions.

Most previous work on standards and technical regulations has focused on the rules themselves, rather than their design and application or enforcement through specific at-the-border mechanisms. There are a number of recent exceptions, however. Karov et al. (2009) focus on identifying the trade impacts of US phyto-sanitary regulations at the product-country level by analyzing the effects of treatment requirements and grants of new market access. Similarly, Alberini et al. (2005) examine implementation of the FDA’s seafood HACCP program using a dataset of plant inspections. Neither paper, however, deals with the food import refusals mechanism that is the focus of the present paper. Buzby et al. (2008) and Buzby and Roberts (2010) analyze similar data on US import refusals to that used in the present paper, but only provide descriptive statistics. Baylis et al. (2009) is the first paper to investigate US import refusals empirically. In order to test whether import refusal decisions are biased, and what are the reasons for it, they look at a set of potential factors triggering refusals. They find that contrary to prior expectations, countries with experience in exporting products to the US are actually subject to relatively more refusals, thereby suggesting some degree of “stickiness” in the refusal determination process. Their findings also suggest that refusals are influenced by political pressure.

Related work has also been conducted on European food standards. Baylis et al. (2010) use data on EU import alerts—closely related to refusals2—in a gravity model to show that they tend to decrease trade.3 However, they do not examine the determinants of import refusals, and in particular the potential for reputation effects, which is the focus of our paper. Baylis et al. (2011) use information on EU notifications and find that increased use of notifications is linked with a decreased level of protection through tariffs. They also see that European countries that would intuitively be demanders of protection tend to be at the origin of more notifications than their EU partners. Finally, the first stage of the empirical approach taken by Cadot et al. (2009), which tests whether import alerts contribute to increase trade costs and thus supplier concentration, uses EU import alerts as the dependent variable, but the cross-sectional setting of their regressions means that they are unable to account for reputation effects of the type we are interested in here.